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China reported much weaker than expected industrial production data for November overnight, and given that these data rarely surprise significantly on either side of expectations, the signal value seems particularly large. Risk appetite took a dive on this and on Brexit developments, with AUD and especially NZD taking the brunt of the pressure among G10 currencies, as one would expect.

The kiwi has likely peaked or is very near peaking for the cycle if next week’s trade and especially GDP data don’t surprise significantly to the upside.

The Brexit denouement continues to dominate sentiment in Europe after May’s proposals for dealing with the Irish backstop issue were met with utter disdain by other EU leaders, who found them unrealistic and don’t see a path to parliament passing a version of the deal. They are apparently so convinced that the deal won’t be passed, and that May is not worth talking to any further on the matter, that they have cancelled plans to create reassurances linked to the existing plan.

My firm impression is that the EU wants to force the issue toward a second referendum and a reversal of the Brexit vote while both sides are making a show of preparing for a no-deal Brexit on March 29 (even if that is where we are headed, there would like be extensive delays to allow for an orderly transition).

Think back to the Danish referendum rejecting the Maastricht Treaty in 1992 and the Dutch and French popular rejection of the new EU constitution in 2005. The Danes were offered a second chance to “vote right” and barely did so in 1993, while the French and Dutch popular votes were ignored as only parliament was allowed to vote on the ensuing 2007 Lisbon Treaty. The EU is learning the wrong lesson from history – this is the 2018 of Brexit, Yellow Vests, Lega/FSM and AfD, and an evacuation of the political centre and distrust in the anti-democratic elites. A Brexit reversal is unlikely, and if it does come to pass, might have devastating consequences.

As we mentioned yesterday, were it not for the Brexit situation, the setup for a more resilient and even strong Euro might be there provided that other key factor – the US-China trade showdown manages to stumble towards a ceasefire or better before the supposed March 1 deadline. Alas, a terrible French PMI this morning and Bundesbank downgrade of next year’s GDP are weighing and EURUSD may probe the cycle lows here…

Yesterday’s European Central Bank outing hardly added anything to the equation for the euro, as there was no surprise in the ECB committing to reinvesting in new securities as portions of its purchases mature in coming months, and it promised to spread purchase out over the year to smooth the uneven rate at which baskets of maturities on their balance sheet might mature. In the presser, a gloomy Draghi stressed the downside risks and new ECB staff projections lowered GDP forecasts for the next couple of years, even if the forecasts remain above economists’ consensus estimates. Also, inflation projections were tweaked up 0.1% for this year, lowered 0.1% to 1.6% for next year, and kept unchanged at 1.7% for 2020 – a ho-hum affair to say the least.

The general sense is that the ECB will do what it can to keep markets orderly and offer support, but on a low key level. The long term arc suggests that the next major policy impetus must come from the fiscal and political side, with the ECB as a mere accessory to its plans.

Chart: AUDUSD

AUDUSD is breaking lower here below the recent support line below 0.7200. Breaks in the Antipodean currencies that unfold on Fridays are difficult to trade, but the break back lower could open up a full probe to the cycle lows and more if US equities close on a sour note to end the week today, if the FOMC isn’t sufficiently dovish next week and risk appetite remains in a funk and we see no further promising headlines out of the US-China negotiations. Our chief concern for Australia is the risk that a credit crunch sends the country into a recession and requires a suddenly more activist RBA – this angle on the Aussie’s prospects has seen insufficient attention.

Source: Saxo Bank

The G10 rundown

USD – the US dollar absorbing safe haven flows on the souring mood overnight. The situation looks very headline prone as the market hopes for more positive headlines on the US-China relationship and for the Fed to continue to decelerate at next. If it gets both, the USD may soften again, but if it gets neither, the USD resilience is likely set to continue.

EUR – Brexit weighing here on the euro, which his ignoring the positive recent Italian budget news. Medium to longer term, one wonders if the yellow vest movement in France together with the snowballing of populism across the EU is changing minds in the ivory towers of government that a new approach is necessary – i.e. grappling with debt and considering fiscal stimulus. Bundesbank cuts German GDP forecast this morning and French flash PMIs collapsed this morning (no surprise there).

JPY – the yen absorbing some safe haven flows and matching the USD firmness this morning – would expect USD and JPY to remain loosely correlated in the crosses.

GBP – fresh woes for the Brexit outlook on the latest developments, but sterling doesn’t really move much because this doesn’t clear up the odd of the endless menu of potential paths, from second referendum to a delay to eventual elections or a no-deal Brexit – any or all of which are possible.

CHF – Brexit uncertainty and risk off weighing on EURCHF here again, with the 1.1200 line in the sand not far away if recent lows around 1.1225 don’t support.

AUD – Aussie suffering this morning on the negative news out of China and breaking to a new local low – an important development technically as AUD remains high beta to risk appetite and the US-China trade negotiation outcome.

CAD – prefer to CAD and NZD in the crosses, but will likely stay on weak side of USD if market mood remains sour – next key for notable separation from 1.3400 will be next week’s FOMC meeting.

NZD – the highs in broad terms may be in here – NZDUSD doing a more complete turn lower and rejecting the attempt above the 200-day moving average.

SEK – bad news for the euro this morning weighs here too but EURSEK reluctant to commit in either direction here until we get a look at Riksbank next Thursday. Weak risk appetite not SEK-supportive.

NOK – Norges Bank sounding firm on a March hike but this only gives NOK a fleeting bid as weak risk appetite and heavy oil prices weigh.

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